Guernsey: Guernsey Extols The Benefits Of Island Life

Although it boasts a thriving private equity industry,
Guernsey must lessen its dependence on UK-sourced business and
diversify into other areas if it is to prosper, writes Yuri Bender
ofPWM.

Along with other islands and landlocked territories, fast
transforming themselves –from 'offshore' havens to
international financial centres – Guernsey is undoubtedly
suffering from the recession.

All practitioners on the tiny, picturesque and often fogbound
island, lurking between the UK and France, agree the "good old
days" of continuous expansion in all areas of banking and
financial services are over. What is increasingly becoming clear is
that Guernsey, and its competitors, must carefully select those
niches in which they hope to prosper and allocate resources
accordingly.

For Guernsey, the undoubted area of success has been setting up
and running private equity funds, as more wealth managers look to
offer opportunities to private clients, interested in diversifying
portfolios. It has certainly helped that Guy Hands has made the
island his home, along with his Terra Firma Capital Partners group,
one of Europe's largest private equity firms. Other major
players including Apax, Permira, French group PAI and Nordic house
EQT also run funds from Guernsey. "Private equity has been the
most prevalent asset class for Guernsey by a long margin,"
says Ben Morgan, a partner at law firm Carey Olsen, responsible for
setting up "well over half" of the £280bn
(€320bn) of fund assets managed from and registered on the
island. Fund assets domiciled in Guernsey have risen 60 per cent
over the last three years.

Since Schroder Ventures dipped its toes in the water and set up
what is believed to be Guernsey's first private equity fund 25
years ago, other groups have not been shy to follow. When private
equity groups look to choose a jurisdiction, they simply want a
location which already boasts several other firms and is acceptable
to investors, claim practitioners.

"They want the jurisdiction issue to be neutral; they
don't want to draw attention to it when raising money,"
says Mr Morgan. "So you are likely to choose the same place as
the competition when launching a new fund. That has benefited
Guernsey."

In fact Guernsey firms need to be careful about not singing
their message too loudly in the wrong places, says Mr Morgan.

"You never get asked about Guernsey in the community of
referrers who know our island," he says. "If you go up to
a London lawyer, well versed in alternative investments, you will
lose their attention very quickly if you attempt to sell Guernsey
as a jurisdiction to do business in; they know it already and so do
their clients, so you would be wasting your time."

Where the island does need more publicity is further flung
countries in Asia, Latin and North America.

"There are huge parts of the world where the Guernsey brand
does not have penetration and where it can compete successfully
with other jurisdictions," he adds.

"Most institutional investors have vast teams of people who
go in to do due diligence and negotiate fees, meaning much of the
AIFMD is of no benefit to them whatsoever," believes Mr
Morgan.

'Dual regimes' from July 2013 will enable distribution
of Guernsey products into both EU and non-EU markets. Regulations
from Guernsey need to be "sensible, flexible and
proportionate," Mr Morgan says, "allowing only good guys
to operate from this island. We are never going to get it 100 per
cent right, but Guernsey does a better job of regulation than most
onshore jurisdictions. The roots of most scandals are firmly
onshore, even where there is an offshore element."

Ogier, Carey Olsen's key Guernsey competitor, sees the
forthcoming EU regulations as broadly positive for the island,
although the journey may not be a smooth one. "AIFMD could
potentially provide an enormous opportunity, but it may be a bit of
a rollercoaster ride," says the firm's partner and
practice head William Simpson.

Like Carey Olsen, Ogier is happy to exploit strong links with
London and other European jurisdictions, although there is an
increasing recognition that diversification of new business will be
necessary.

"More than half our business is associated with the City of
London," says Mr Simpson, adding that London has the benefit
of not just the Channel Islands nearby to conduct
"taxneutral" business, but also Luxembourg and
Dublin.

Although the fund groups setting up on Guernsey normally have a
London base, the greater part of their investors come from
developing markets in the Middle East, North Africa and Central and
Eastern Europe.

Clients from these countries are also increasingly coming to
Guernsey to set up structures to protect their wealth and transfer
it securely to the next generation. Trusts are much more tightly
regulated here than in onshore jurisdictions such as the UK, while
families can also choose to tie up their wealth using a company or
foundation structure.

"The concept of trusts – on the private wealth side
– is not so easy to explain in Eastern Europe and
Russia," says Mr Simpson. "It can be slightly challenging
to say to some of these people: 'give me all your money and
trust me to look after it'."

Firm Foundations

That is why recently-introduced Foundation legislation has
proved attractive to clients from some further-flung territories.
"Foundations have been particularly interesting for clients
from common-law jurisdictions, that don't have the familiarity
of trust as a concept," says Alan Pearce, managing director of
Royal Bank of Canada (RBC) Trustees in Guernsey.

The new structure offers them the same amount of confidentiality
and asset protectio, without actually handing over control of the
assets, he says. Private clients disillusioned with organizing
their banking and financial affairs in other jurisdictions are
coming to Guernsey in increasing numbers, says Mr Pearce, with
wealthy individuals concerned their details may be shared with
foreign authorities.

"Clients from UBS have come to us and said they were
worried about remaining with Swiss banks," he says.

What is more, clients from developing economies, who previously
banked in Geneva, are beginning to favour the Channel Islands as
their regulatory standards become better respected internationally.
Guernsey has signed 40 tax information exchange agreements and is
top of the compliance league for financial centres, according to
figures from the Financial Action Task Force, which polices
financial centres. Using a local structure to avoid tax in a
foreign country is a criminal offence under Guernsey law.

"Latin American clients used to do their banking in
Switzerland, but that is now changing, as the offshore islands come
off country blacklists," says Mr Pearce. "We are becoming
centres of advice, particularly after the reputational damage
Switzerland has suffered during the last few years."

Russian clients too have had problems using Switzerland and are
becoming interested in using Channel Islands banks to organise
succession planning. Mr Pearce reaffirms these are people who do
not want to avoid tax, but keep a low profile when it comes to
attention from their competitors and governments.

"Taxes in Russia are not high, with a 13 per cent top rate.
Russians are not moving their assets for tax reasons," he
says. "Just like Latin Americans, it is for fear of
confiscation and disclosure. But they also want access to
London's capital markets."

"Most Chinese individuals will not now create a trust in
the jurisdiction of Hong Kong, as it is considered too close to
home," says Mr Pearce, referring to the expected change of the
territory in 2037 from a Special Administrative Region (SAR) to a
fully integrated Chinese province. "Any trust being created
now will need to last well beyond that date."

In fact Guernsey is the centre of excellence for RBC's Asian
clients, with the island office playing a key role in establishing
the RBC Wealth Management operation in Hong Kong. For RBC, the
private client trust side is integral to the wealth management
business and employs 380 people across Jersey and Guernsey.
Relocating wealthy Asian families to Vancouver and elsewhere on the
Canadian West Coast and structuring their investments remains a
major plank of the business.

Distant shores

"A lot of the newer wealth is being generated to the East
and we are able to tap into that through the core teams we
have," confirms Sean Bougourd, head of private banking for SG
Hambros in Guernsey.

The group employs 250 individuals across both islands. Many
transactions for their clients are typically made in London and the
structures put together in nearby Guernsey, less than an hour's
flight away. But the further away the client is based, the more
challenging the relationship, he admits.

"The easiest clients to deal with are the local ones, where
you knock on their door, take them to dinner and drive them home
afterwards," says Mr Bougourd. "It's a much longer
drive if a client is based in Eastern Europe or Asia."

Due diligence becomes more difficult the further you travel,
agrees Charlie Roger, head of Collins Stewart Wealth Management in
Guernsey, about to be re-branded as Canaccord Genuity Wealth
Management under its new US owner. The group runs £9.5bn
across Geneva, London, the Isle of Man and both Channel Islands.
More than one third of the group's 300 staff are in Guernsey,
where the entire operational platform is based.

"David Cameron and Gordon Brown are flying out for mutual
love-ins with the Chinese and other jurisdictions," says Mr
Roger. "We are all out there trying to get business from
emerging markets, which may or may not have human rights issues.
Therefore we have to take a risk-based approach to client
acquisition."

The commodities boom of 2008 to 2010, predominantly in Russia,
has led to wealth creation and a need for clients to diversify away
from the gas industry into other jurisdictions and asset classes,
says Ken Bradley, head of Barclays in Guernsey. "Typically
they want to invest in a prime UK property through structures which
Guernsey can assist with."

Like most practitioners in the island capital of St Peter Port,
which has many finance houses tucked away in the undulating,
historic backstreets, Mr Bradley is well aware that such
arrangements are looked at suspiciously by many commentators in
London and the US. "The UK and Europe are going through
significant changes, which are very anti-free market," he
says. "Freewheeling Reaganomics was the flavour of the 1980s
and 90s, but today the climate is the exact opposite. We live in a
different era with its own challenges."

Guernsey has ridden the economic and regulatory storm well,
although has not emerged completely unscathed says Fiona Le
Poidevin, chief executive of Guernsey Finance, whose role includes
marketing the island's capabilities internationally. The
Channel Islands are still being targeted unfairly by politicians
and media commentators, who need to think about the wider
contribution to business, says Ms Le Poidevin.

"We have had flat GDP growth, but are inextricably linked
to our main markets of the UK and wider Europe," she says.
"Pressure from the UK Revenue has made it difficult for us,
with international pension business effectively closed down and we
are very disappointed with that, but are moving onto bigger and
better things."

Ms Le Poidevin takes encouragement from the fact that UK Liberal
Democrat leader Nick Clegg recently praised the Channel Islands for
their contribution to the UK economy at his party conference.
"It is a long time since we have heard that kind of accolade
from a politician, so hopefully we are turning a corner. We now
need to do more to educate the general population, not just
business."

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